Each years seems to bring a unique crisis to the telecommunication
landscape. Problems brewing over several years suddenly take on new
dimensions. Peripheral issues burst int prominence. And a rush among
industry peers ensues to analyze, resolve and, above all, succeed.

The year 1984 is no different. Rising to headline status are the
many aspects--threatening or promising--of bypassing the local telephone
facilities.

A good deal of confusion seems to swirl about the concept of
bypass; therefore, a quick definition that is applicable throughout this
article: Bypass occurs when customers avoid a telephone company's
twisted-pair cable network through alternate telecommunication services.
The existing local exchange is effectively bypassed. Often, a dedicated
circuit connects a client's location with a long-distance
carrier's point of presence, therein bypassing the local telephone
network. Both the carrier and the user save access-charge costs.
Revenues that under any other circumstance would be flowing into
telephone company coffers are diverted.

The potential impact of bypass is far reaching for telcos, users
and vendors alike. Users in particular are at a crossroad, a
predicament of which telcos must be wary and on which bypass vendors can
capitalize. The uncertain regulatory climate, too, is producing a heavy
dosage of confusion among industry participants and watchers.

Arising out of this confusion is one common thread: A concerted
effort to come up with some answers. Whether telco, vendor or user,
concrete facts and valid statistics seem to be in short supply.

The market is almost beginning to assume a cluttered look thanks to
the various technologies competing for industry recognition and market
share. There are currently six premier offerings: microwave, satellite,
optival fibers, Digital Termination Systems (DTS), coaxial cable and
infrared. Although microwave probably enjoys the greatest popularity,
offerings such as fiber optics will eventually overtake it in terms of
the amount of traffic carried. More and newer forms of bypass will also
vie for market prominence (cellular radio, for instance, one it becomes
truly cost-justificable) as the decade matures. Users as a result will
have even more technologies to evaluate and select from.

Whatever the technology, more and more users are beginning to
seriously explore the alternatives. Although it may mean departing from
a normal service routine and embracing a relatively unfamiliar
technology, MIS managers are already actively evaluating the pros and
cons of bypass implementation.

They have good reason to do so, with the bottom line being dollars
saved. In a hypothetical situation, a state telecommunication director
has responsibility for a 20,00-line Centrex. He estimates that by
utilizing an on-premise vehicle in lieu of Centrex, he can reduce his
local loop needs by approximately 25 to 33 percent.

If a $6-per-line-per-month charge were to be levied against his
Centrex, that's well over $1 million each year to retain a service
he was concerned about to begin with. He starts shopping around,
perhaps only half in earnest. Continuing in a hypothetical vein,
suppose he was confronted with a choice between remaining with his
service as usual--with its inherent data limitations, access charge and
all--or investing $5 million in a bypass system and acquiring an
on-premise switch. If you evaluate just the access-charge savings, the
bypass system could annually recover 25 to 33 percent of his earlier
telecommunication cost. And you now have the capacity for high-speed
data transmission tossed into the deal.

Numbers such as these are causing a good deal of smiles among
bypass corporate higher echelon. Bypass is already occurring, and the
pace seems to be quickening. Will the BOCs suffer revenus loss? Yes.
The difficulty lies in assessing the magnitude of that loss.

The operating companies are well aware of the serious problem
presented by potential revenue loss to bypass vendors. In addition the
problem is compounded by a curious Catch 22: As telco customers abandon
traditional service, subscribers remaining on the network will be
subjected to rate hikes in order to compensate. The telcos will levy
these hikes to pay for equipment, and ensure against heavy losses. But
this measure in turn will generate incentives within the remaining
subscribers to turn elsewhere. The telcos lose again.

Let's look at the pros and cons of bypass. Evidently there is
alot to be said for bypass alternatives. Bypass is a reality and a
growing reality at that. Here are some reasons why:

* Some boast faster service than the local telephone companies.
That could be critical considering that, prior to divestiture, telcos
wer able to meet installation dates more than 95 percnt of the time.
Since the breakup the rate has dropped to 20 percent.

* Some vendors with their particular offering can provide new
service or services not before available.

* Bypass vendors point out that owning a system could promote
greater control of system cost--over the long term. And on top of that,
as has been the way of other technologies, time will see the price
structure come down, encouraging even wider abandonment of traditional
telco facilities. Users Taking a Cautious Approach

Despite the fact that vendors of bypass alternatives have an
impressive arsenal at their disposal, clients aren't necessarily
throwing themselves at their doorsteps. Yet. In the eyes of the
cautious MIS manager, bypassing the local telephone company is an
uncertain venture at best. Bypass vendors have to assuage the fears of
potential customers and assure them of the integrity of their networks.
That's not always an easy accomplishment by any stretch of the
imagination.

Beyond that, the initial investment is often extremely burdensome.
For most organizations today, bypass is simply too highly priced.
Frequently, only those companies equipped with the highest
telecommunications budgets are able to justify what could be an enormous
venture.

In addition, each bypass technology carries inherent disadvantages
for users over and above the obvious alienation of telephone companies.
DTS, for instance, although capable of transmitting wideband data
ranging from 9.6 kb/s to 56 kb/s, presently is not overtly competitive
for voice traffic. Another example might be CATV's limited hurdles
to two-way voice and data. The list goes on.

Is the concern of the Bell operating companies then justified? The
statistics say yes. With close to 31 percent of the Fortune companies
employing bypass by year -end 1984, both the long and short-term
ramifications of bypass are rapidly assuming very real--and
measurable--dimensions. Projecting three years down the line, in 1987,
indications are emerging that point to a 44-percent bypass penetration
of the Fortune ranks. And that's a conservative estimate. (Also
see story on the ICA bypass survey, July CN, page 30B).

As it is, bypass penetration is not restricted to the Fortune
participants. Approximately nine percent of the service industry
already uses one of the many variations of bypass. By 1987, this figure
will have mushroomed to 24 percent. Of the population of universities
in the United States, 61 percent will have implemented bypass by 1987,
compared to 16 percent by year-end 1984.

In addition, approximately 60 percent of utilities already have
made the often cost-prohibitive transition to bypass. Like the others,
that industry, too, will jump several percentage poins by 1987--to
7-percent penetration. Clearly, the direction of the industry is
conjuring images of substantial changes in the marketplace.

It is precisely numbers such as these that generating concern among
telco pundits.

Why are companies so willing to drop a service that is both
familiar and ubiquitous? Obviously, economics have a lot to do with it.
But the problem is not so easily defined. Several factors are
involved--factors that include the huge telecommunications and data
communications traffic among the Fortune ranks; traffic that aggregately
surges upward each year. Over 66 percent of the Fortune 250
headquarters switches are greater than 1,000 lines; another 21 percent
are between 501 and 1,000 lines. The demand generating from these huge
communications hubs is tremendous.

The allure of bypass, therefore, transcends the monies realized
over time; it includes the prospect of merging data processing with the
intensive telecommunication traffic. And for the comtemporary MIS
manager, any potential assistance in cutting through the chaos of
corporate information system is worth taking a very serious look at.

But the worries of the operating companies don't stop there.
One of the alternatives being examined by the telephone companies to
help stem by bypass tide is to offer substantial upgrades on their
acknowledged large Centrex base--in effect, bring a premium Centrex into
the scene to reduce the chances of a user opting for an on-premise
switch and a bypass alternative. But once again the statistics paint a
grim picture. In 1981, a high 35 percent of Centrex users had plans to
abandon Centrex; last year that number had risen dramatically to 55
percent. And close to 70 percent of the Fortune Centrex base may opt
for an alternative because of access charges. So even when dealing with
potential answers to the bypass threat, the BOCs are seeing their
efforts short-circuited.

Back orders at AT&T also have the BOCs concerned. In April of
this year, between 25,000 to 30,000 lines were backlogged. That's
almost one out of 12 lines installed. Users care little if it's
AT&T that's backlogged or the BOC. Users see only a delay in
line installation--another incentive to turn to a bypass vendor. Large
Toll Users

Environments particularly vulnerable to bypass (that is, heavy
data/voice traffic) search for a savings range of 15 to 40 percent. It
is interesting to note that most of these "at-risk" areas
comprise the roughly two percent of all business customers who presently
account for 80 percent of all business toll revenues. Take away that 2
percent . . .

As noteD, vendors are studying closely several regions and
industries. They have met with encouraging success--so far.
Counter-strategies are being developed by telephone companies to
abbreviate this trend.

The counter-strategies to be employed with minor exceptions are
more or less consistent from one regional holding company to another.
As expected, public utilities commissions around the country are being
stormed by protests. The telcos are arguing for cost-based pricing in
order to avoid a rush of customers away from their facilities. The
ultimate cost of bypass, they maintain, will be levied against
residential and small businesses since they will have to be hit with the
increased charges that are "forced on" the telcos.

Their posture is becoming more agressive--necessarily so. In what
has recently emerged an intensely competitive market for voice and data
traffic, any organization forced to price significanlty higher than the
competition could conceivably be placed in a very precarius position.
Market share would almost certainly be jeopardized. Telcos Enhancing
Services

The telcos, however, aren't stopping there. Additional
avenues they are pursing include enhancing Centrex features, employing
local area data transport services, upgrading local calling services and
features, introducing their own bypass capabilities and acquisitions.

Telcos are well aware of the potential damage they could suffer if
AT&T enters the melee. Certainly AT&T has substnatial
incentives to bypass telco facilities, if only to buttress a sagging market share. If, in fact, AT&T Communications dedicates enough
energy on the Fortune 1,000, revenues resulting from providing bypass
service in 1990 could exceed $5 billion, compared to $500 million in
1985.

So the surface threat to telcos does seem to be substantially real.
Whether or not customer network integrity is jeopardized by following
the bypass route remains for many uncertain. For vendors, the profits
are there if the technologies can both the priced attractively and
survive the test of time.

Whether vendor, telco or user, 1985 looks to be a very intriguing year--a year of resolutions and compromises perhaps, but certainly a
year of decisions.

To date, uncertainty has stasmped the issue. Indeed, apparently
the largest single problem emanating from the bypass controversy today,
is that more questions have emerged than answers:

* How much does it really cost businesses to install private
facilities to bypass the local telco?

* What will equal access do to the market shares of the OCCs?

* How will the RBOCs reprice their local loops to offset the
attractiveness of bypass?

* What impact will bypass ultimately have on the RBOCs, AT&T,
and OCCs?

* Which bypass technologies will best withstand the test of time?

Once these questions (and many others) have been satisfactorily
resolved, the road to cost-effective decision making becomes smooth. In
the final analysis, economics with dictate the course for telcos,
vendors and users. After all, it was economics that helped spawn these
new technologies. And it will be economics that determine the long-term
winners in what has suddenly emerged as a hotly disputed market.

COPYRIGHT 1984 Nelson Publishing
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